Monday, June 4, 2012

Magic Mosco

Pierre Moscovici says that France will trim its budget deficit to 3% of GDP by 2013 without austerity. I breathlessly await further details. Perhaps the state has signed a contract with David Copperfield.

1. Bert is right. For Keynes, all spending at times like this has value and government spending is particularly important when the economy is contracting because of cutbacks in private spending (which are rational but counterproductive (see, “paradox of thrift”).

2. Keynes would, I believe, strongly recommend against any tax increases at a time when the economy is so weak. The time for tax increases is after stimulus has sparked significant economic growth at which time it may be desirable to increase both taxes and interest rates to keep the economy from overheating (and also to pay off the debt incurred fighting the last recession and, if possible, to build a surplus to use during the next down cycle). Now is the time for government to spend (preferably on useful things like roads, schools, repairing municipal water systems, etc) to reduce the extent to which the economy will contract and to stimulate private spending.

3. What makes you think that there is so much wasteful spending by the French government? More specifically, how are you defining "wastful"? In America, we are increasingly coming to define wasteful spending as money which is spent on stuff we don't like or is given to people who aren't us. I hope France doesn't go down that path, again. It ended very badly for France last time.

1) there are several versions of Keynes within Keynes own work, but I don't think Keynes would have appreciated as pro-growth, say, a generous gift of 100% of GDP by the State to the cause of Chilian butterflies — yet, this IS huge government spending. So, what matters is not spending by itself, but its impacts on the economy (work instead of unemployment, wages for workers instead of "rentiers", investment instead of destroying assets). And what our governments during the 30 last years did, was precisely anti-Keynesian in this sens: unemployment instead of work, more incomes for "rentiers" instead of workers, destroying assets instead of building them.

2) Of course we do suggest tax increases (by 50 billon € / year, that 2.5 GDP points). But it's only one half of the money we need. And I don't think we can seriously face an increase by 100 billion, or 5 GDP points. And we can quite easily (technically…) find 50 billion savings. That's only 4% of public spending — many organizations, when facing crises, succeed in cutting 4% of their spending without reducing their outputs / services.

3) Drugs are paid in France (and reimbursed by the social welfare system) twice more expensive than in New Zealand. That's 12 billion € dilapidated for no added value. Nuclear bombs were upgraded by the Chirac/Sarkozy governments. What additional growth or social benefits could that upgrade bring? That's billions (of €). The organization of French public hospitals is, in some respects, 10 or 20 years behind other countries (such as Switzerland, Austria, the Czech Republic). That's around 5 billion €. The government subsidizes "les heures supplémentaires" (Eng. ?) for staff already having jobs, instead of subsidizing new jobs: that's around 5 billion €. The "formation professionnelle des salariés" (lifelong learning?) system is designed to waste money, with many predators living quite well out of it: I can figure around 2 billion euros are wasted, that is, spent without any relevant training service at relevant prices. Well, that is for the top of mind.

An addition! To answer Mitch's comment on "spend (preferably on useful things like roads, schools, repairing municipal water systems, etc)". Because this is the usual advice of Krugman or Stiglitz. Well, I was only twice in the USA, in 2007 and 2008, and I found these options VERY relevant as far as the USA are concerned.

But in France: our roads are the best in Europe, most of our schools are brand new, our water systems are references for the rest of the world.

Hey, I know: not everything is flawed in France! That's our good point: the widespread interest for common infrastructures.

But here is the beef: since 30 years, public mind didn't care any more for economic performance, "development", ability to export our goods and services, to compete with the rest of the world… or to play our part in the Nations concert.

Instead of that, we (as an Nation) invested into our local comfort: nice school buildings (letting the educational system in the building go down), nice roads (letting cars grow larger and larger, drinking oil and consuming space), wonderful drink water factories (at space rocketing prices).

And because that has a cost, we borrowed the money.

Should we go further in the same direction? Or rather ask the simple question: how will we create the conditions, the environment, in order to earn the money, deliver goods and services, export?

I don't know, bert, if "A lot of people don't take Bayrou at all seriously", but I think we would be better off when they will.

I just saw your reply, Frédéric. It's possible you won't see this, all this time later. But let me anyway apologise first of all for any snark in my original comment. As for the substance, you seem to be arguing for structural reforms and public sector retrenchment. I don't want to put words in your mouth, but looking around Europe perhaps the guy you're looking at as a model is Mario Monti.

Clearly, this isn't a Keynesian approach. There's a famous passage in Keynes about how, in the absence of other projects, it may make sense for the government to go around the country burying money, so stimulating activity by incentivising people to go and dig it up.

As to which approach is right, that's for another discussion. But I don't think you can really get away with presenting your preferred programme as an alternative to austerity.

I would argue, first, for stopping the "delegation" of public services to companies at much higher costs for the taxpayer.

I would also argue for more effectiveness in the public sector. For example, our health sector underperforms by 10 to 15% compared to others in Europe (even if it overperforms by far the US health system). The performance of our education sector decreases every year, when compared to other OECD countries, whereas its cost increases every year. And so on.

So, I think that the crisis of our public sector is basically the crisis of an underperforming system — and that making it more effective, more dedicated to serving the people (the society, the economy, the environment), will be key for our recovery as a country within globalization.

And that burying money to let people dig it up would not be the best incitation to competitiveness ;-)

I agree with Mario Monti on the principle that a sound economy is a balanced one, at least in the long term. I don't agree with him on the ways he take to achieve that in Italy — more precisely, I don't know the Italian situation so well, but I would not agree the same decisions to be enforced in France.

Same opinion on the IMF recommendations, and so on… These people just don't see the nature of the crisis (imho). They don't understand the link between the health of a society, and the performance of its economy.

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I have been a student and observer of French politics since 1968. In that time I've translated more than 130 books from the French, including Tocqueville's Democracy in America and Thomas Piketty's Capital in the 21st Century. I chair the seminar for visiting scholars at Harvard's Center for European Studies and am a member of the editorial board of French Politics, Culture, and Society and of The Tocqueville Review/La revue Tocqueville. You can read some of my writing on French politics and history here and a short bio here. From time to time I will include posts by other students of France and French politics (accessible via the index link "guest"). My hope is that this site will become a gathering place for all who are interested in discussing and analyzing political life in France. You can keep track of posts on Twitter by following "artgoldhammer".